JUST as it seemed the bearishness would not end, emerging markets are finally enjoying some sunshine. Worse-than-expected US jobs data, an agreement on a giant trade deal and a dovish reading of Fed minutes have put a temporary end to two months of unprecedented volatility.
Commodity prices and battered currencies have staged a recovery. Traders bet that markets had overreacted to the twin worries of a China economic slowdown and rising rates, especially since central banks would remain supportive. Within Asia, Singapore, Malaysia and Indonesia stood out as the better performers.
John Woods, Credit Suisse Private Banking and Wealth Management regional chief investment officer for the Asia-Pacific, said in an October note with a three-to-six month outlook: "We have moved our view on Asian equities to 'outperform' within the MSCI Emerging markets universe, due to the recently improved technical and valuation metrics.
"The pronounced selloff in the MSCI Asia ex-Japan Index - specifically in August 2015 (down 10 per cent) and generally since May 2015 (down 25 per cent) - has left the asset class unattractive and arguably oversold," he said. The MSCI Asia ex-Japan stock index is now up more than 8 per cent from its Sept 29 low.
Mr Woods noted that bonds are holding steady. "Our sense is that Asia's less-excitable bond investors - comfortable with the region's default risk - have refused to panic sell. Assuming the right 'buy' catalysts materialise, it is possible that equity investors may follow their lead," he said.
Catalysts can include an improvement in China's growth, policy support from global central banks and improved earnings, he said.
Bank of America Merrill Lunch said in an Oct 6 note that a short-term recovery in asset prices is worth betting on.
It said: "We think bad news is likely to be good news for emerging markets in the coming three months, as US rate-hike projections collapse yet again into March 2016, offering more breathing room to emerging markets, where corporate debt ... has risen."
On Friday, Singapore's benchmark Straits Times Index hit an intra-day high of 3,011.63 points before settling at 2,998.50, up 7 per cent from 2,793.15 points a week ago.
The Indonesian rupiah rallied from almost 15,000 to the US dollar a week ago to just over 13,000 on Friday; the Malaysian ringgit went from 4.5 to the US dollar to 4.1.
The past week brought the signing of the Trans-Pacific Partnership, a trade pact among 12 nations including US and Japan; the agreement is expected to boost smaller Asian economies like Vietnam and Malaysia.
The latest boost to markets came on Thursday night, with the release of the minutes of the September US Federal Reserve meeting. The minutes noted that some Fed members were worried about a premature rise in rates; others argued that a significant delay would risk an undesirable buildup of inflationary pressures.
The minutes said: "Most members agreed that their confidence that inflation would move to the committee's inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labour market conditions improved further. Many expected those conditions to be met later this year."
A Citi Research note on Oct 8 argued that the minutes "showed surprising coherence among participants supporting the decision to delay a rate increase". "The operative restraint was the absence of additional confidence in the committee's inflation forecast reaching target in the medium term," it said.
As the world heads into the third-quarter results season, things might not be so positive, said DBS Bank.
In an Oct 5 note, it warned that stocks might still fall again.
"The business of spinning bad news into good news on the cheap money argument has a limited shelf life. It runs out when earnings start dropping ... The bigger picture trend is of peaking and mean reversion in US corporate profits," it said.